Russia Hit By Sanctions; Euro-Zone Slows On Renewed Concerns
While Russia has been experiencing a slowdown for quite some time, the new round of sanctions imposed by the West has hit the economy even harder. The recent fall in oil prices added to the economy’s woes. Though geopolitical tensions in Syria, Iraq and Ukraine, as well as slowing growth in Europe remain concerns for the economy, the situation brightened for Turkey compared to the previous quarter due to an improved political climate.
Poland, the biggest of the central and East European economies, is going through a rough patch as renewed growth concerns in the Euro-zone, including Germany, cast a shadow. However, the cut in interest rates should help revive domestic consumption. Hungary clocked the fastest growth rate among the European Union countries during the second quarter, with political stability contributing to the revival of the economy.
The export-oriented economy of the Czech Republic was weighed down by weakened export markets such as Germany, but the helpful stance of its central bank has been supportive. Though Greece came under a cloud recently with yields on 10-year bonds rising to 7.85 percent, it appears the economy will be able to achieve the target of 0.6 percent growth for the year helped by exports, investments, and tourism.
At a Glance
Russia: Russia’s economy managed to post a growth rate of 0.8 percent on a year-on-year basis in the second quarter. However, the prospects for the economy remain bleak after a new round of sanctions imposed by Western powers against Russia in July, and geopolitical tensions stirred in the continuing standoff in eastern Ukraine.
Turkey: For Turkey, the increased Russian trade should help make up for both the shortfall in exports to the European Union and the damage caused by the blocked access to Turkey’s export markets by Islamist militants.
Poland: What has been particularly hurtful for Poland is the slump in Germany, which accounts for 25 percent of the country’s exports, and the sealing off of Russia’s borders to Polish food imports.
Czech Republic:Factory activity in the Czech Republic increased to 55.6 points in September. The rebound, after a decline in August, was largely due to the increase in production of automobile companies, which contribute a majority of the economy’s GDP.
Hungary:The fastest pace of growth in eight years was driven by the increased production of cars even as the Euro-zone and most of eastern European region slumped. The economy’s industrial output increased in September compared to August.
Greece:Fiscally, the economy seems to be doing well by surpassing its budget targets during the year so far, a likely indicator that the economy could well exceed its stipulated fiscal target for 2014. Retail sales rose 4.8 percent in July compared to the year-ago period.
RUSSIA: SANCTIONS BEGIN TO BITE
Russia’s economy managed to post a growth rate of 0.8 percent on a year-on-year basis in the second quarter, the latest period for which data is available. The government has forecast the economy will grow 0.5 percent for the year.
Monthly industrial data for September was also encouraging with output increasing 2.8 percent compared to the year-ago period, after posting no growth for August. While factory output increased due to factors such as demand for materials to build a pipeline to China, food production of vegetable juices, fruits, cheese, and meat surged after President Putin slapped a ban on imports from the European Union and the United States.
Still, the prospects for the economy remain bleak after a new round of sanctions imposed by Western powers against Russia in July, and geopolitical tensions stirred in the continuing standoff in eastern Ukraine. In fact, the impact of economic sanctions has been felt in the economy in more ways than one. The rise in consumer prices has fanned inflation, which still hovers around the 8 percent mark. The currency ruble has continued to decline, while capital flight in the first half of 2014 is estimated to be more than $75 billion. While sanctions restrict Russian companies and banks from accessing foreign capital, borrowing costs for the Russian government are at a five-year high. Russian energy companies too have been hit as they now lack access to Western technology needed for oil exploration. The recent fall in oil prices, which are crucial to keep Russia’s budget balanced, add to the concerns. Household consumption and business investment slowed sharply during the second quarter.
Meanwhile, it is feared that Russia’s slowdown will spillover to some countries in Eastern and Central Europe that have business ties with their bigger neighbor. Recognizing the prevailing economic situation, the International Monetary Fund (IMF) reduced its growth forecast for the Russian economy to 0.5 percent in 2015. And as a Bloomberg article pointed out, after raising interest rates three times this year to rein in inflation, the Russian central bank is in no position to heed calls to boost economic growth through monetary easing.
TURKEY: GROWTH SLOWS ON WEAK DEMAND, SLUMP IN EXPORTS
Turkey’s economy seems to have lost much of its momentum going into the second quarter. Economic growth increased an annualized 2.1 percent in the second quarter, which was below expectations due to weak domestic demand on the back of rising interest rates early in the year. To put things in perspective, consumer spending inched up a mere 0.4 percent year-on-year in the second quarter, compared to a 3.2 percent rise in the previous quarter.
The economy had clocked 4.7 percent GDP growth in the first quarter. Slowing exports due to sluggish growth in Europe, Turkey’s main trading partner, and geopolitical tensions also weighed on economic expansion. Though slowing economic growth has triggered calls for an interest rate cut, it appears that the Turkish Central Bank does not have much leeway to trim rates as inflation continues to be high and the current-account deficit remains huge.
However, Turkey is trying to rev up its economy by strengthening its trade partnerships with Russia and the United States. Turkey, which lies at the crossroad between the Middle East and Europe, is boosting food exports to Russia to fill the void felt by Russians from the imposed a ban on imports from the West. For Turkey, the increased Russian trade should help make up for both the shortfall in exports to the European Union and the damage caused by the blocked access to Turkey’s export markets by Islamist militants. On the downside, increased food exports could lead to a rise in domestic prices in Turkey. Meanwhile, the United States recently agreed to boost its investments and trade in Turkey, led by the infrastructure, technology, and tourism sectors.
Despite improved trade ties, Turkey recently cut its growth estimates for the current year and next and upped its forecast for inflation. Deputy Prime Minister Ali Babacan cited geopolitical tensions in Syria, Iraq and Ukraine, as well as slowing growth in Europe as dark clouds on Turkey’s economic horizon. Turkey now expects inflation to touch 9.4 percent by the end of the year with 3.3 percent economic growth in 2014 and 4 percent in 2015. Meanwhile, the International Monetary Fund took a benign view of Turkey’s economic expansion, saying Turkey’s economy will grow, albeit moderately, at the rate of 3 percent this year, driven by exports, infrastructure spending, and a pick-up in private consumption.
POLAND: GROWTH SLOWS ON LOW DOMESTIC DEMAND, EXPORTS
Poland’s economic growth slowed to a meager 0.6 percent in the second quarter compared to 1.1 percent growth in the previous quarter due to the slowdown in Germany, together with the Ukraine crisis, which affected its exports. Though an index of Polish manufacturing showed a slightly better reading in September, it still was below the positive threshold of 50 points. The weakness in manufacturing is partly attributable to the fall in local demand as the country has a big domestic market. For instance, car production fell 1.5 percent on an annual basis in September pointing to a drop in demand. Taking note of the slowing growth in the Euro-zone, which buys more than half of Poland’s exports, the government also slashed its growth forecast for next year to 3.4 percent from its earlier view of 3.8 percent. Encouragingly, inflation has remained below the central bank’s target of 2.5 percent as consumer prices have been low.
Poland’s central bank has demonstrated that it works in tandem with global central banks in their quick-silver responses to crisis situations. After a gap of 15 months, the bank cut the benchmark interest rate to 2 percent, further than what the analysts were expecting, and said it may go for one more rate cut. It is widely viewed that the change in the central bank’s stance is a tacit acknowledgement that Poland’s economic recovery is not on track, albeit mostly due to factors beyond Poland’s borders. What has been particularly hurtful for Poland is the slump in Germany, which accounts for 25 percent of the country’s exports, and the sealing off of Russia’s borders to Polish food imports.
In a political development that could have a bearing on the economy, Prime Minister Donald Tusk has moved on to become the chief of the European Council based in Brussels. It remains to be seen if his successor Ewa Kopacz can carry forward Tusk’s economic legacy, which kept Poland in good stead even during the recession of 2008-09.
CZECH REPUBLIC: SPOTLIGHT ON MONETARY POLICY
Factory activity in the Czech Republic increased to 55.6 points in September. The rebound, after a decline in August, was largely due to the increase in production of automobile companies, which contribute a majority of the economy’s GDP. Moreover, it is expected that industrial production will continue to expand through the year. On a quarterly basis, the economy grew 0.3 percent in the second quarter after emerging from recession in 2013.
Though the economy depends on Germany for most of its exports, the country’s exporters seem to have found new trade partners in markets such as China, Latin America, and the United States, which gives the country an advantage over economies such as Poland. The Czech central bank, which has been following a helpful monetary policy to prop up the economy, kept interest rates unchanged at 0.05 percent in its meeting held in September. The policy of keeping the currency koruna weak has also helped the economy grow for three successive quarters now, thanks to exports. Still, the central bank said it expects economic growth to be driven by domestic consumption rather than exports.
Addressing concerns about prolonged deflation, central bank governor Miroslav Singer commented that as the European Central Bank has announced several stimulus measures since the month of June, the likelihood of continued deflation is minimized. Mr. Singer went on to say in a WSJ interview that the annual rate of inflation in the country inched up to 0.7 percent in August from 0.6 percent recorded in the previous month. The central banker said higher auto sales are an indicator of a pick-up in retail sales. The decline in the country’s savings rate also allays fears of a deflation, Singer said.
HUNGARY: CLOCKS FASTEST QUARTERLY GROWTH RATE IN THE EU
During the second quarter of 2014, Hungary’s economy posted a growth rate of 3.9 percent compared to the year-ago period. The fastest pace of growth in eight years was driven by the increased production of cars even as the Euro-zone and most of eastern European region slumped. The economy’s industrial output increased in September compared to August, which recorded a fall. The fall in output in Germany, Hungary’s largest export market, was singularly responsible for reduced factory activity in the country in August.
Hungary has expanded its industrial base rapidly, serving as home to vehicle production units of several major car makers based in Germany, Japan, and the United States. Notwithstanding the growth rate, a report in The Wall Street Journal pointed out that the ongoing conflict in Ukraine could affect Hungary’s economy in the future. Pharmaceuticals, vehicles, and machinery make up 60 percent of the country’s exports to Russia, though food exports also contribute a minor proportion.
Meanwhile, consumer prices fell 0.5 percent in September from the year-ago period, thanks to a government-mandated reduction in utility bills. Like its counterpart in Poland, Hungary’s central bank cut interest rates to 2.1 percent in July to address falling consumer prices, which have kept inflation low. The effect of the rate cuts was immediately felt in the housing market, which rebounded after the rate-setters promised to boost growth and lending by keeping interest rates unchanged through next year. Currently, the central bank is targeting an inflation rate of 3 percent.
Given the more or less steady pace of economic growth since recovering from recession, Hungary now expects its export-oriented economy to grow 3.1 percent this year. Prime Minister Viktor Orban, re-elected in April 2014, said the economy’s return to growth has been the result of his policies, which have included tax hikes for certain industrial sectors and caps on local energy prices that have reined in inflation. While his detractors may disagree about the efficacy of his programs, Hungarians seem to have reposed faith in their leader to steer the economy for the next four years.
GREECE: ECONOMY FLASHES MIXED SIGNALS
Greece’s economy continued to make steady progress during the review period. While the economy expanded 0.4 percent to 0.7 percent on a quarterly basis in Q2, helped by exports, investment, and tourism, the pace of contraction narrowed to just 0.2 percent on an annualized basis. The economy had shrunk annualized 1.1 percent in the first quarter of the year. The encouraging Q2 numbers seem to affirm the likelihood that Greece will be able to achieve the target of 0.6 percent growth for the year expected by the country and its group of creditors that include the International Monetary Fund and the European Commission.
Fiscally, the economy seems to be doing well by surpassing its budget targets during the year so far, a likely indicator that the economy could well exceed its stipulated fiscal target for 2014. On another note, retail sales rose 4.8 percent in July compared to the year-ago period, though private consumption was expected to remain muted this year.
In another sign of confidence, the Antonis Samaras government unveiled its budget for 2015, which envisions higher growth for the economy. In fact, the administration hopes that Greece will be able to exit the bailout package by the end of this year, a year ahead of schedule. To garner support for its exit program, the budget includes tax cuts on heating oil and a lowered tax rate for restaurants. The budget also included a projection that the economy would grow at the rate of 2.9 percent next year.
Playing spoilsport, the southern European economy came under a cloud when its 10-year bond yields, a proxy for its borrowing costs, climbed to 7.85 percent, sending stocks plummeting. That raised a big question mark over the government’s plan to exit the bailout program early. While Samaras may have been driven politically to come out of the IMF-EU bailout early, the move stoked fears of a snap poll, unnerving the markets. Still, Samaras has categorically ruled out early elections and said he would continue with the reform program. Amid the confusion, Greece won the endorsement of a high-ranking European Union Commission official, who applauded the progress made by Greece in implementing economic reforms, and pledged that the EU will continue to back the economy’s efforts to return to stability.
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
